Exam 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Suppose ABC's common stock has a return of 12.87 percent,the risk-free rate is 2.65 percent,the market return is 13.46 percent,and there is currently no unsystematic influence affecting ABC's return.Given a one-factor APT model,what is the factor beta?

When selecting a benchmark,it is important to match the security or portfolio that will be evaluated to securities:

Assume a security has no unsystematic risk.Given this,the excess return on that security will be the highest if the factor,F,________ and the beta for that factor is ________.

Suppose Binder Corporation's common stock has an actual return of 12.34 percent compared to its expected return of 12.6 percent.The risk-free rate was expected to be 4.3 percent,which it was.The beta of F_i is .9 and the beta of F_GNP is 1.1.If inflation unexpectedly increased by 1.4 percent,what was the unexpected change in GNP?

The stock of a silver mining company most likely has a:

Company A is a medical research company that develops and tests new drugs.Company B is in the news industry and publishes multiple newspapers.If Company A discovers a new product and its stock rises in value by 5 percent as a result,this will most likely have ________ effect on Company B's stock price because the discovery would be classified as ________ risk.

Explain the concept of a benchmark and why benchmarks provide value when evaluating the performance of a security or portfolio.

The acronym APT stands for:

Consider the security market line (SML)under the one-factor model.Assume Point C lies on the SML but an investor would prefer a point that also lies on the SML but is lower and to the left of Point C.How can this investor obtain that point for their portfolio?

Which one of the following statements is true?

Outdoor Products stock has an expected return of 12.6 percent and betas of: β_GNP = 1.52; β_I = 1.06; and β_Ex = 1.28.This expectation is based on a three-factor model with expected values of: GNP growth of 3.2 percent; inflation of 2.9 percent; and export growth of 2.2 percent.However,actual growth in these factors turns out to be 3.6 percent,3.2 percent,and 2.5 percent,respectively.Calculate the stock's total return if the company unexpectedly announces they had an industrial accident and the operating facilities will close down temporarily which will reduce the return by 7 percent (from 10 percent down to 3 percent).

Assume the single-factor model applies and a portfolio exists such that 65 percent of the funds are invested in risky Security Q and the rest in the risk-free asset.Security Q has a beta of 1.5.The portfolio has a beta of:

The symbol "F_I" is best defined as the:

The single-factor model generally uses ________ as the single factor.

The unexpected return on a security is made up of:

Which type of risk is unaffected by portfolio diversification?

Suppose you identified three important systematic risk factors given by exports,inflation,and industrial production.At the beginning of the year,a firm's stock return is estimated at 9.6 percent and the growth in the three factors is estimated at −1 percent,2.5 percent,and 3.5 percent,respectively.The factor betas are: β_EX = 1.8,β_I = .7,and β_IP = 1.What would be the stock's total return if the actual growth in each of the factors was equal to the expected growth and no unexpected company news occurred?

A three-factor model would most likely include factors such as:

Assume the single-factor APT model applies and a portfolio exists such that half of the funds are invested in risky Security Q and the rest in a risk-free asset.Security Q has a beta of 1.8.The portfolio has a factor beta of:

The systematic response coefficient for productivity,β_p,would produce an unexpected change in any security return of [β_P × ________] if the expected rate of productivity was 1.8 percent and the actual rate was 2.2 percent.